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Contract farming in India

In partial fulfillment of the requirement of Master’s in Business Administration Course (MBA) Session: 2009-2010 International School Of Informatics and Management Jaipur

SUBMITTED BY: Babita Joshi MBA: II SEM

Contract farming in India

EXECUTIVE SUMMARY
Master’s in business Administration (MBA) is a course that lays emphasis on both theoretical and practical aspects of the education. It’s rigorous curriculum is designed in such a way that the student gets to know the available tools required to run a successful business organization and also apply them practically at various training programs, which a undertaken as a part of curriculum. As a part of our curriculum designed by Rajasthan Technical University, Kota we are required to undertake a research on Contemporary management issue. This reaesrch serves the purposes of acquainting the student with environment which is of great relevence to the field of management .Only theoretical knowledge is not enough but its practical application is also required to be learned. In this respect I took upon the issue of “Contract Farming” which is directed towards the most spoken issue in the recent times that is state of Indian Agriculture. As per the latest developments the India the government is laying special stress on improving the state of indian farmers. As per the reports the input price in agriculture are high this is lowering down the interest of farmers to practice agriculture this is causing food inflation to sore great heights. This is creating ripple effect in food industry as profit margins are declining. So the corporate farming has emerged as a new the dimension in this field where the corporate world is taking measures to ensure that the farming practices are improvised and the state of Indian agriculture is improved. In this project I took an extensive reaearch on the current scenario in the agriculture which was taken from the research papers published and the journals which highlighted the facts and figures indicating the present cases. The next part of this included case studies on corporate presence in agriculture. In the end carrying out this research was of great importance in enhancing my knowledge about the subject.

Contract farming in India

ACKNOWLEDGEMENT
The project of this magnitude would not have been completed singly. Firstly I want to give my hearty thanks to all mighty who made the world and me also. There are many other people without whom the completion of the project would not have been possible. Some have contributed towards this directly while other have provided indirectly. I am indebted to Dr. Ashok Gupta (Director ISIM, JAIPUR) for providing me a good learning platform that provide me a distinct edge in the corporate world. I would like to convey my heartiest gratitude to Dr. Manju Nair(PRINCIPAL ISIM) and Dr. Kanwaldeep Dixit (Assistant Principal HOD Marketing) and all the faculty members whose guidance helped a lot during my training.

Babita Joshi MBA: II SEM

Contract farming in India

CONTENTS
1. 2. 3. 4. 5. 6. Introduction Objectives of Study State of Indian Agriculture Plight of Indian Farmers Set up the Building Blocks for Business Advantages of Contract Farming

To the Farmer To the Company To the Country 7. Cases of Contract Farming

Corporate Farming in India Corporate Farming : A Tool of Growth or not 10. 11. 12. 13. 14. 15. 16. Bottlenecks and Criticisms A Lot can be done Despite the Absence of a Legal Framework Research Methodology Questionnaire Suggestions Conclusion Bibliography & Webliography

leave alone a remunerative price. and has recently been promoted by the central government as well. in the form of the corporatization of agriculture. However. as in many other developing countries. the Indian agricultural sector had been relatively spared from the most extravagant excesses of neoliberal interference. there have been few systems/models in which farmers are assured of a market for their produce. as the central government and several state governments in India are gradually won over by the dubious charms of contract farming.
. including in India. and trade liberalization which exposes these farmers to competition from highly subsidized production in the developed world. This reflects the combination of reduced subsidy and protection to farmers in developing countries. and is being actively promoted by major international donor agencies as well as by multinational companies that stand to gain from this process. in a range of adverse ways. has created unprecedented agrarian crisis over much of the developing world. along with deflationary policies which have hit rural public expenditure. That reprieve now seems to be over. and the threat to the viability of cultivation. This combination. until now. This is increasingly being presented as the great new hope and the way out of the morass in which Indian agriculture now finds itself.Contract farming in India
INTRODUCTION
Farming is an age-old means of livelihood for millions of Indians. However. The most evident is the squeeze on farmers’ incomes. Globalization has already affected the farm sector in India. Farmers have on occasion had to throw their produce away for want of buyers. which has come about because of rising input costs and falling output prices.

. On the other is the agri-based and food industry. exports. which requires timely and adequate inputs of good quality agricultural produce. The essence of such an arrangement is the commitment of the producer/ seller to provide an agricultural commodity of a certain type. at a time and a price. including the required technical advice.
Contract farming usually involves the following basic elements-pre-agreed price. Towards these ends.’
Recognizing the need for and merits of such a linkage with the farming/producing community. based price. quantity or acreage (minimum/maximum) and time. processing. have attempted to establish convenient systems/models that ensure timely and consistent supply of raw material of the desired quality and low cost. quality. etc. which promises to provide a proper linkage between the ‘farm and market. the farmer is required to plant the contractor’s crop on his land. and to harvest and deliver to the contractor a quantum of produce.
Contract farming is defined as a system for the production and supply of agricultural/horticultural produce under forward contracts between producers/suppliers and buyers. This article discusses a few successful cases of contract farming and a brief note on the bottlenecks and criticisms leveled against this emerging alternative farm business model. and in the quantity required by a known and committed buyer.Contract farming in India
This is one side of the coin. According to the contract. the contractor supplies the farmer with selected inputs. several corporate involved in agro-commodity trading. This underlying paradox of the Indian agricultural scenario has given birth to the concept of contract farming.

especially of oilseeds. The consortium is also planning to rope in other specialist partners including insurance. changing laws to enable and support it. contract farming in wheat is being practiced in Madhya Pradesh by Hindustan Lever Ltd (HLL). while the farmer supplies land and labour. In this arrangement. the contractor supplies all the inputs required for cultivation. cotton and horticultural crops”. farmers. Rallis supplies agri-inputs and know-how. agencies. among other things. Punjab and Tamil Nadu. Karnataka.Contract farming in India
Thus. Under the system. equipment and storage companies.
. are actively promoting Contract farming. HLL. and technologies and the context in which they are practised. legal support to contract farming agreements. adequate and quality input supply including free technical know-how. capital inflow and assured market for crop production. Rallis and ICICI. while Rallis and ICICI benefit through assured clientele for their products and services. farmers benefit through the assured market for their produce in addition to timely. The NDA government at the Centre has already drafted a model law on agricultural marketing to provide. HLL benefits through supply-chain efficiency. provides the buyback arrangement for the farm output. The Government of India’s National Agriculture Policy envisages that “private sector participation will be promoted through contract farming and land leasing arrangements to allow accelerated technology transfer. However. including lifting of land ceilings. Several state governments. the processing company. and ICICI finances (farm credit) the farmers. in Andhra Pradesh. and providing companies interested in it with a variety of incentives. the terms and nature of the contract differ according to variations in the nature of crops to be grown. Gujarat. subsidies and tax rebates. which requires the farm produce as raw material for its food processing industry. For example.

at a time and a price. In this context. Contract farming is defined as a system for the production and supply of agricultural or horticultural products under forward contracts between producers/supplier sand buyers. are under active pressure to change their policy towards contract farming. based upon anticipated yield and contracted acreage. the terms and nature of the contract differ according to variations in the nature of crops to be grown. but need not always be so. and to harvest and deliver to the contractor a certain amount of produce.Contract farming in India
Other state governments. However. and in the quantity required by a known and committed buyer. This could be at a pre-agreed price. The typical contract is one in which the contractor supplies all the material inputs required for cultivation. and technologies and the context in which they are practised. the agencies or companies concerned types of farmers. Typically. the farmer is required to plant the contractor’s crop on his land. the contractor supplies the farmer with selected inputs and technical advice. typically a large company. while the farmer supplies land and labour.
The essence of such an arrangement is the commitment of the cultivator to provide an agricultural commodity of a certain type. According to the contract.
. including in West Bengal. it becomes urgent to assess the experience with contract farming both internationally and in the recent Indian context.

Contract farming in India
Objectives of the study
• • • To find about the present state of Indian Agriculture. • To highlight the pros and cons of contract farming. To elaborate the concept of contract farming.
. To analyse the important of contract farming using text and cases and carrying out surveys.

Contract farming in India
OBJECTIVES OF CONTRACT FARMING
.

There is. There may be occasional bright patches here and there (India can certainly boast of a few model farms and a few up-to-date agricultural research stations and institutes) but.Contract farming in India
STATE OF INDIAN AGRICULTURE
Most interesting fact about economic conditions in India is the overwhelming preponderance of agriculture in the economic life of the country. The other important fact about agriculture in India to-day is the very large area of fallow land which is cultivable but not cultivated.
. under-nourished and lazy. therefore. speaking generally. India is still in the "middle ages". we are struck by the singularly backward character of the agricultural economy. and the cultivator is ignorant. pasture. compared with conditions obtaining in European countries. in fact. i. agriculture is still pursued in old primitive ways. we find that. does not pay. It is. 67 per cent of the total population of India.culture. agriculture still dominates the economic scene and the signs are that it would continue to do so for many years to come. poor. By whatever standard and from whatever angle do we attempt to appraise agricultural conditions in India.. a very vicious circle : agricultural 3peraticwns are primitive because the cultivator is ignorant. as at present conducted. poor. agriculture still absorbs the greatest possible mass of human effort and energy. fishing and hunting as profession would rise to 234-8 millions.e. Notwithstanding the steady expansion of industry and trade and the increased employment therein of a steadily larger section of the population. evident that in India. undernourished and lazy because agri. The population dependent on agriculture. But when we look at the figures of agricultural production and of the per capita income of the agricultural population of the country.

capital inflow and assured markets for crop production. cotton and horticultural crops. has also made a set of proposals to promote contract farming. a high proportion of land under cereals and other food crops is an index of agricultural overpopulation. a Working Group set up by the National Development Council. under the leadership of the Punjab Chief Minister Amarinder Singh. This has been the result partly of the pressure of a growing population on land and partly of the absence of opportunities for any other type of employment in the villages. and all efforts to bring this land into cultivation have apparently failed.
. According to certain authorities. The other important fact about agriculture in India is the very large proportion of food crops in the total scheme of agricultural production (vide Appendix Table II). Now. India is believed to still possess more than 110 million acres of land classified as "culturable waste". multinational companies and even the government.Contract farming in India
It is significant that notwithstanding the favorable prices of agricultural products during the present war. The UPA government’s Approach Paper to the Eleventh Plan gave priority to the development of contract farming. by major international donor agencies. the net increase in the area sown has been negligible. It is argued that private sector participation will be promoted through contract farming and land leasing arrangements will allow accelerated technology transfer. especially of oilseeds. Between 1921 and Contract farming is increasingly being presented as a solution for the problems of Indian agriculture. The other important fact about agriculture in India is the very large percentage of landless rural labourers who sell their physical labour to farmers in order to earn their livelihood.

many of whom are already operating at the margin of subsistence. which are increasingly involved at each stage of the agriculture system. Archer Daniels Midland and Monsanto. exemption of market fees. It is not generally known that US farmers have not really gained from the continuing government subsidies to agriculture . This system has old historical resonances. These corporations achieve domination over the market through a combination of horizontal and vertical integration.. and liberalized imports of seed varieties for contract farming programmes. So it is important to be fully aware of the implications and the need for adequate regulation of contracts. which has been so marked in the US over the past two decades. like Cargill. This has increased the margins for the procuring and processing firms while at the same time reducing farm incomes and increasing the prices for the consumers.instead large agribusinesses have made huge and increased profits. But the more recent pattern of contract farming has been developed especially in the United States.Contract farming in India
In addition to suggesting greater liberalization of laws and rules for crop contracts. duty-free imports of machinery and equipment. Agricultural trade globally is dominated by transnational corporations. it has proposed tax rebates for food processing. This explains the rising spread between retail prices and the prices received by farmers and livestock breeders.
. US farmers are financially and politically much stronger than Indian cultivators. etc. such as the infamous contracts enforced by indigo planters in eastern India during the early colonial period. where corporate penetration of agriculture is probably the most advanced.

small and marginal farmers faced discriminated pricing both in the factor and product markets and that has resulted in reducing their net income flow. This would address three important issues simultaneously.
. First. This was fuelled by many overt and covert changes in the sector. the capability of small and marginal farmers has always been far better than their large holding peers in terms of productivity and quality of land. but diversification of crops along with the advent of WTO and liberalization policies were the main players in the structural change. One of the ways to deal with this small scale farm operations is to bring small and marginal holders (not holdings) together in a production system so as to deal with a particular product. the access to technology by the small and marginal farmers has been quite restricted and it is was only available to those who could garner information at a fast speed. One of the important bottlenecks. highlighted by many analysts of Indian agriculture refers to the small size of holdings and the inability of the Indian farmers to compete with the large scale farming of the West. But all these years that could not be taken advantage of due to the scale and limited access to technology. The recent NSSO report (59th Round) highlights this fact. These aspects need immediate attention and as society responds quietly to the challenges in its own manner.Contract farming in India
PLIGHT OF INDIAN FARMERS
The structure of Indian agriculture underwent rapid changes during the nineties both due to the pressure of commercialization and increased dependence on trade. Second. This was manifested in the proverbial “level playing field” often referred to in recent debates. Lastly. contract farming has emerged in the country like the Pepsi Model initiated in Punjab.

He has analysed five different contracting agencies and contract farmers connected with these agencies in Southern Karnataka. The study emerged out of his personal keen interest and persuasion. Therefore. asymmetry about sharing gains between contractors and contractees and the exploitation by contractors. The study by Dr. He has been successful in bringing out a few basic problems in contract farming in Southern Karnataka.Erappa is an attempt to fill this void. There are a good number of indepth studies available in the literature on contract farming analysing these issues but not much has been done in the context of Karnataka. market dependence. The basic hypothesis attempted in the study is to look into the question of “boon or bane”. tendency towards monoculture. I am sure that this study would be useful to those who are looking at the regional specification of contract farming models and responses of various farm groups in the process.
. S. The answer provided is not in terms of monosyllables but provides a good background analysis. contract farming is emerging in the resource constrained region with low capital formation as its hallmark. in addition to the coverage in the field. The study will also be useful to academics working in this field to fish out new questions in the process.Contract farming in India The experience has given rise to a large number of controversies including overexploitation of land. It assumes additional significance as in Karnataka. the study indicates his concerted efforts and analytical prowess. where it is emerging steadily but firmly as an alternative.

Transportation Logistics Prompt Farmer Payment System
R & D Activities
Evaluation of Promising Varieties and Hybrids Multi Locational Trials and Short-listing .Contract farming in India
Set Up The Building Blocks For The Business
COMMERCIALIZATION
Land Preparation & Planting. Crop Monitoring During Growing Period Harvesting & Procurement.Selection Blueprint for Agricultural Practices After Adapting To Local Conditions. To Suit Intellectual & Financial Means Of The Farmer Evaluation of Farmer Economics Model Demonstration Farming
.

 Crop Monitoring On A Regular Basis.Contract farming in India
THE ADVANTAGES OF CONTRACT FARMING To the Farmer: Exposure To World Class Mechanized Agro Technology.  No Requirement to Grade Fruit.  Long Term Planning Made Possible.
.  Protection from Fluctuation in Market Pricing. As Mandatory For Fresh Market Sale. Free Of Cost at His Doorstep.  Obtains An Assured Up Front Price & Market Outlet For His Produce.  Bulk Supplies versus Small Lots as Again Required by the Fresh Market.  Concept Can Be Extended To Other Crops. Technical Advice.  Builds Long Term Commitment  Dedicated Supplier Base  Generates Goodwill For The Organization.  Supplies Of  Healthy Disease Free Nursery  Agricultural Implements  Technical Bulletins Etc  Remunerative Returns
To the Company: Uninterrupted & Regular Flow of Raw Material.

 To increase private sector investment in agriculture.  To flatten as far as possible.  Broad based contract farming programs can be one possible solution.  Building capabilities.  New markets are necessary.  New marketing strategies. particularly for landless agricultural labour.  To generate gainful employment in rural communities.  To generate a steady source of income at the individual farmer level.  Promoting investment.
.  Technology enhancements improve the lot of our farmers.Contract farming in India
To the Country: To reduce the load on the central & state level procurement system.  To promote processing & value addition. any seasonality associated with such employment.  New thinking to boost Indian agriculture.  To bring about a market focus in terms of crop selection by Indian farmers.  To promote rural self-reliance in general by pooling locally available resources & expertise to meet new challenges.  To reduce migration from rural to urban areas.

while PepsiCo required at least 40000 tons of tomato to operate its factory. At that point of time. Sceptics had expressed doubts over the feasibility of the Zahura tomato processing plant. and in 1989. the company recognized that investment in agro-processing plants would not be viable unless the yields and quality of agricultural produce to be processed were up to international standards. available over a 25-28 day period. The company required this intake over a minimum 55-day time frame. and had said that it would remain a museum piece! There a wereformidable challenge before the company and nothing short of a horticultural revolution was required to solve the problem. there were simply not enough quantities of tomato available even if the grown varieties/hybrids were procured from the open market. or to introduce modern farming practices. However. viscosity and water binding properties. with a focus on high yields and other desirable processing characteristics such as colour. Pepsi Foods Ltd.
Launching its agro-business in India with special focus on exports of value-added processed foods. The Classic Case of Pepsi Foods Ltd. The total Punjab tomato crop was 28000 tons.Contract farming in India
1. before long. the season in Punjab did not last beyond 28 days. There were no logistically efficient procurement models for fruits and vegetables that could be built on by the company. The company intended to produce aseptically packed pastes and purees for the international market. tomato had never been cultivated in Punjab for its solid content.of-the-art tomato processing plant at Zahura in Hoshiarpur district of Punjab. little effort had been made to create a database on the performance of various varieties and hybrids. Furthermore. These apart. (‘PepsiCo' hereafter) entered India in 1989 by installing a Rs 22 crore state.
. which had a gigantic capacity of 39 tons fresh fruit per hour.

(PAIC). productivity increases. PepsiCo knew that changing the mindset and winning the confidence of farmers would not be an easy task for outsiders. spices (chillies) and oilseeds (groundnut) as well.Contract farming in India
There was no choice but to alter the tomato production and logistics situation in Punjab.and desired produce-specific research. Encouraged by the sweeping success of contract farming in tomato in several districts of Punjab. agricultural practices. The company focused on developing region. and the introduction of modern technology.
. This led to the birth of PepsiCo’s backward linkage with farmers of Punjab. measured in terms of new options for farmers. The company’s unique partnership with PAU and PAIC fuelled its growth in Punjab. where the grower plants the company’s crops on his land. Right from the beginning. and regular inspection of the crop and advisory services on crop management The PepsiCo model of contract farming. apart from other vegetable crops like potato. PepsiCo follows the contract farming method described earlier. It was thus successful in bringing about a drastic change in the Punjab farmers’ production system towards its objective of ensuring supply of right produce at the right time in required quantities to its processing plant. has been an unparalleled success. Another important factor in PepsiCo’s success is the strategic partnership of the company with local bodies like the Punjab Agricultural University (PAU) and Punjab Agro Industries Corporation Ltd. and extensive extension services. PepsiCo has been successfully emulating the model in food grains (Basmati rice). and the company provides selected inputs like seeds/saplings.

closely monitor the performance of the crop. In 2001-02.
. the company procures the entire pre-agreed quantum of the harvested produce at the farm gates. which had been involved in the export of Basmati rice since 1990. By the end of 2009. After extensive multi-locational field trials at its 27-acre R&D farm at Jallowal near Jalandhar. value-added groundnut such as roasted and salted peanuts. The company invested over Rs 5 crore in a modern processing plant at Sonepat in Punjab. contracted farmers reaped yields of 2. seed multiplication and development of a package of practices for farmers. farmers from Jalandhar. ensuring that the product remains completely traceable from field to consumers. PepsiCo ventured into contract farming in Basmati rice on a commercial scale four years ago. who ensure successful transfer of technology from the trial to the commercial field levels. During 2007-08 crop year. PepsiCo planned a foray into contract farming in groundnut with the farmers of Punjab with the objective of producing export-quality. PepsiCo’s scientists. Hoshiarpur and Sangrur districts of Punjab. The raw material so procured is transferred to PepsiCo’s ISO 9002 and Hazard Analysis Critical Control Point (HACCP) certified Rice Mill located at Sonepat for processing. and parts of Western Uttar Pradesh were contracted for Basmati rice cultivation. At the time of harvest. Amritsar. was the first processor in India to invest and strengthen backward linkages for Basmati rice. packing and export. at the pre-agreed price. Similarly. the company plans to increase the acreage under Basmati rice to 4000 hectares to meet the complete requirement of its manufacturing plant. and peanut butter. flavoured and coated peanuts. The season’s acreage for the crop stood at 800 hectares.5 tons/hectare.Contract farming in India
The company. It is involved right from the stage of selecting varieties of Basmati (based on customer preference).

as long as you are offering technology that offers predictable results that are in line with the expectations of the farmers.
“Till date. Seth.one in the kharif and the other in the rabi season. much above the national average of 1. Its focused research on increasing yield levels.Contract farming in India
Using plastic mulch groundnut (PMG) technology sourced from China has enabled PepsiCo to take up two crops in a year . who have shown great interest. A sound R&D program backed by committed extension personnel to transfer the resulting technologies has been the intrinsic strength of PepsiCo.” says Mr. The company has demonstrated yields of 3.
. colour. sharing his experience. there have been no serious defaults.0 and 4. Post-PepsiCo entry has seen the tripling of yield levels in chilli (from 6.0 tons/ha to 20 tons/ha) and tomato (1416 tons/ha to 52 tons/ha).
The company proposes to extend its contract farming in groundnut to farmers in Rajasthan and Uttar Pradesh.0 tons per hectare on field trials for kharif and rabi crops respectively. Abhiram Seth. the company has been conducting initial trials at Neelamangala in Karnataka to evaluate varieties/ hybrids of chilli for their yield.
As part of its expansion plans.0 ton/ha. defaults remain minimal” says Mr. ExecutiveDirector (Exports and External Affairs) of PepsiCo. pungency and other traits/parameters. total solids. “We plan to go commercial with chilli farmers of Karnataka next year. to the advantage of farmers (which in turn brings down the cost of raw material to the company) has resulted in their increased trust and loyalty towards the company.

● Execution of technology transfer through well-trained extension personnel. ● Supply of timely and quality farm inputs on credit. “Our immediate focus would be to consolidate and strengthen the existing activities”. With this kind of a backward linkage with farmers of Punjab and Haryana.
Key elements of PepsiCo’s success
● ● Core R&D team.
. Prompt dispatch/delivery/procurement of the mature produce from every individual contracted farmer through the system of ‘Quota Slips’ ● Effective adoption/use of modern communication technology like pagers for communication with field executives ● Regular and timely payment to contracted farmers through computerized receipts and transparent system ● Maintenance of perfect logistics system and global marketing Standards. PepsiCo developed a perfect contract farming model involving an enduring relationship with local agencies including the State Government.Contract farming in India
On the company's plans. Unique partnership with local agencies includes a
public sector enterprise. ● Supply of all kinds of agricultural implements free of cost to contracted farmers. he said.

the ginning and trading house from Pollachi (Coimbatore district of Tamil Nadu. Appachi’s Integrated Cotton Cultivation: Innovative Model
Appachi Cotton Company (ACC). This led to the farmers’ perceiving the ICC programme as a boon.
The Appachi formula ensured that its farmer members never went short of money and materials during the crucial 100 days of the crop cycle. The singer in the street play assured cotton farmers that. quality-conscious clients from the textile industry in India and abroad. which would guarantee a market-supportive mechanism for selling their produce. This was done at a time when failure of monsoon for the third consecutive year was imminent. India) hit the headlines in May 2002 for the street play it employed to encourage farmers in the Nachipalayam village in Kinathukadavu block of Coimbatore to sow cotton seeds in their fields. unlike in the past. Well in advance of the 2007 kharif sowing season. they would not be disappointed if they cultivated cotton on their fields. and their client specific operation has won them laurels.Contract farming in India
2. ACC undertook the Herculean task of integrating about 600 farmers belonging to various districts of Tamil Nadu on a holistic plank. as they would be backed by a model called the Integrated Cotton Cultivation (ICC).
ACC caters to top-bracket.
. ACC is the only private ginner in the country to have successfully entered backward and forward integration between the ‘grower’ (farmer) and the ‘consumer’ (textile units). as their traditional sources of finance and support had refused further funds due to non-recovery of earlier loans.

and a unique selling option through a MoU with the coordinating agency (ACC). All the participating farmers are asked to issue PDCs (Post Dated Cheques) for the loan they avail. the moral responsibility of fulfilling the bank’s obligation squarely lies on the participating farmer. the farmer groups can call for a tender/auction to sell the accumulated cotton” says Mr. evaluated.Contract farming in India
The contract assured the farmers easy availability of quality seeds. but in the event of disagreement about price during negotiation. interest.
“Our unique and transparent MoU allows the farmer to sell his commodity at the market prices prevailing during the time of negotiation. Each farmer belonging to a SHG is sanctioned Rs 8000/acre as crop loan @ 12 % p. expert advice and field supervision every alternate week. and only then recommended to the lending bank. Hence. The coordinating agency has the first right to negotiate.a. Hence all requests are scrutinised.
. authenticated. Disbursement of this amount is strictly needbased. As cotton is a commodity prone to price fluctuations due to domestic and international market forces. ACC did not wish to create a climate of uncertainty due to pre-fixed prices with the contracting farmers. Allocation and disbursement is at the behest of the coordinating agency. farm finance at an interest rate of 12% per annum. door delivery of unadulterated fertilizers and pesticides at discounted rates. The core principle of the formula lies in the formation of farmers’ Self-Help Groups (SHGs). Chinnaswamy. The Appachi formula differs significantly from other existing contract farming models on its ‘pricing’ front in that no prior price fixing is done in this model.

involving 900 farmers. During the 2007 kharif season. village level meetings. Theni (Bodi and Andipatti) and Nammakal (Thiruchangode) districts of Tamil Nadu were contracted. farm service providers. Mani. the bank and the coordinating agency. The formula has built some checks and balances into the system for early identification of troublemaking farmers or wilful defaulters and their elimination at an early stage to protect the interest of the Group.
“Various methods including street plays. This is the first time ever that a cotton farmer in India has been forwardly integrated to the consumer textile industry. A major portion of our energies were dedicated to bringing together all the linkage players such as the banks.” says Mr. During the season.Managing Partner of ACC. and consuming textile units and ensuring that they stayed committed to the programme. insurance company. about 950 acres of land in various blocks of Coimbatore (Pollachi and Kinathukadavu). “The programme is poised to make a greater impact on cotton agronomy than the existing method of cotton cultivation in the country” exults Mr. The successful implementation of this programme with active participation of 12 farmer groups belonging to various backgrounds and the linkage players itself amplifies the clarity and the transparency the formula holds. Mani Chinnaswamy. door-to-door campaigns.
. and press meets were used to attract farmers’ attention and gain their confidence. the contracted farmers witnessed a remarkable reduction (by 25%) in cost of cultivation. and allows the coordinating agency to participate in the proceedings. display and print materials.Contract farming in India
The MoU clearly stipulates conditions to be followed in case of open tender/auction.

Mani said “The current membership size of these groups is expected to double/triple by the next sowing season”. one group (SHG) One village.
Commenting on the future expansion plans of the company. ACC has attempted to address all the existing maladies of the cotton supply chain. According to the leading ginner. Mr.
Key principles of the ACC model
● ● ● ● ● ● ● ● ● ● One village. who spearheaded the unique supply chain model. one variety/hybrid of cottonseed Crop loan at 12% per annum on Group’s guarantee Door delivery of quality inputs at discounted rates Cotton crop insurance Synchronized sowing Integrated crop management through competent Farm Service Centres Contamination control measures from farm to factory Assured buyback of final produce from farmers’ doorsteps The sponsor (ACC) plays the role of a perfect coordinator/ facilitator between the producer and the consumer.
.Contract farming in India
By integrating backward and forward with the producing and the consuming communities. such a system is ‘the need of the hour’ today not for the ‘growth’ of textile industry in India but for its ‘very survival’ given the imminent hardships and emerging challenges arising out of the perils of WTO (World Trade Organization) and MFA (Multi Fiber Agreement).

barley was cultivated on a commercial scale only in the northern parts of India. is quite interesting and insightful. At that point of time. when the company required 5000 tons of barley annually for its malt unit.. the State Government and other stakeholders.
. the programme is sure to revolutionize the cotton economy and set a successful precedent for many players to emulate the same in their respective enterprises. which established a successful backward linkage with farmers of Northern Karnataka for supply of barley for its malt unit. who had been cultivating sugar under intensive irrigation found themselves with the problem of salinity in soils. barley was known to give economic yields of good quality in saline soils. Farmers surrounding Ugar Sugar in Belgaum. Of these. With the active participation of farmers.
The company assured the farmers of a market for their produce if they agreed to grow barley. Ugar Sugar’s experience with barley
The story of the Belgaum (Karnataka)-based Ugar Sugar Works Ltd. After successive high-powered meetings with concerned State Ministers and officials. which meant huge transportation costs for the company to source from there. All this happened way back in 1997. the formula has got a new fillip.
3. Ugar Sugar took this opportunity to begin creating awareness among the farming community about alternative crops suitable for saline soils.The State machinery is actively participating in propagation of this model in Theni and Namakkal Districts. as well as the required technical and input support.Contract farming in India
The Appachi Formula of contract forming has been so successful that the Tamil Nadu Government is now keenly interested in replicating this formula in various cotton-growing districts of the State.

cost of the seed is same as that of the pre-agreed price of barley.
“The contract farming system helped us get barley with high starch. Executive Director of Ugar Sugar Works Ltd. less protein (<12%) and homogeneity. The company had no land of its own to start barley production near its malt plant. and the most competitive prices” says Mr. the company supplied UBE425 variety of barley to its 470 contracted farmers.
Ugar’s barley contract farming model: Key elements
● The company supplies genetically pure seed on credit to the contracted farmers without interest. in required quantities. who mostly owned between 2-5 acres land.Contract farming in India
Furthermore. which meant no surety of consistent quality raw material.e. This acreage was able to satisfy only 8-10% of the total annual requirement of barley for the malt plant. This led to the birth of Ugar Sugar’s unique contract farming system for barley production.
After intensive research and field testing of over 800 varieties of barley. such lots carried a mixture of feed and malt grade barley. and had resources enough to irrigate the crop at least twice during the crop cycle.
. were within the radius of 40 kilometer from the company’s malt plant. at the right time. P. The acreage under the contract grew from 356 acres in 1997-98 to 1350 in 2000-01 (It dipped to 819 acres in 2001-02).Shirgaokar. ● The price of barley seeds supplied for sowing and the final produce that procured by the company is the same i.V.

However.Contract farming in India
Hence. It was increased from Rs 600/quintal in 1997-98 to Rs 700 in 1999-2000.
. ● Under the contract. and the final produce is procured from the fields at the company's transportation cost. Even if a contracting farmer tries to sell the produce in the local market. he would lose about Rs 350/quintal” clarifies Mr. There have been no defaults till date. Shirgaokar. “As there is no market for barley in the surrounding areas. giving free technical assistance. ● A technical person from the company visits the farmers’ fields at least four times in a crop cycle.
The price of barley fixed by Ugar Sugar varied from year to year depending on the market for barley and malt. the quantity of seed supplied for sowing is recovered from the time of procurement of the produce. ● The company supplies seed at the sowing points in farmers’ fields. Ugar Sugar did not contract for barley production during the recently concluded 2002-03 crop season. it is obligatory on part of both the contracting farmer and the company to sell and buy respectively the entire contracted quantity at the pre-agreed price. with a further rise of another Rs 50/quintal during the 2001-02 crop season. This experience of Ugar Sugar clearly speaks of the ‘price’ dimension (market dynamics) that needs to be addressed in a long-term relationship like contract farming. owing to a dip in the international malt prices. there is no other alternative for the farmer except to sell the produce to Ugar Sugar.

and assured market support even at times of market-induced price crisis are the guiding principles of success for the system. Shirgaokar said “We are also interested in implementing the contract farming system for high density plants such as Casuarina and Eucalyptus to source fuel for our 44 MW cogeneration plant. Belgaum.Contract farming in India
However. In his view. attractive and prompt payment. and that of Marico’s safflower procurement through a successful backward linkage model.
.“Contract farming is one of the best models for ensuring timely and desired quality of barley. which is over 90% based on contract farming. then Ugar Sugar will definitely think of restarting its barley processing by sourcing the raw material through backward linkage. The demonstrated successes of gherkin exporters of Southern India. agro-commodity and food products exports. The Executive Director says. creation of awareness among the producing community about the advantages of the system. Mr. are worth remembering here. Biodiesel plants such as Pongamia also have a great future in the contract farming system.
Elaborating on the company’s future plans on the lines of its venture in barley. and the landing cost per quintal of barley at the domestic market yards).”
The Executive Director feels that the absence of legal framework for contract farming is not a serious impediment to the success of the system. the company remains undeterred by the losses of about Rs 42 lakh it suffered (owing to price difference of Rs 315/quintal of barley between the domestic market where the company was forced to clear its huge quantities of unprocessed barley. Bijapur and Bagalkot are the potential districts for barley contract farming in Karnataka”. If malt prices start climbing. The cases discussed here are a few among several such successful ventures by corporate involved in food processing.

Pawar made it clear that the contract farming model that to be implemented in India will ensure that land is permanently owned and cultivated only by farmers.
The size of agreements for contract farming with the farmers is also increasing manifold. cold chains. The minister added that the government's main concern is that smallholders are not left out in the process. "The main issue is to upscale contract farming. it is likely to become a norm rather than exception. While earlier it was limited to a certain small initiatives by the corporate sector.
. He also asked agro-business firms to integrate farmers on their supply chains through institutions like cooperatives. The central government is so serious about the issue that it is mulling a contract farming policy for India.Contract farming in India
PROS AND CONS OF CONTRACT FARMING
Farmers in India are all set to see a sea-change in agriculture sector soon. electrification and processing." he pointed out. Union Agriculture Minister Sharad Pawar said contract farming is emerging as an important institutional arrangement in India that promotes coordination between production and marketing activities. producers' associations and contract farming. thanks to the entry of business giants like Reliance [Get Quote] and ITC and also because of the encouraging change in the government policies. Winds of change are blowing across the Indian agricultural landscape with the advancement of contract farming.
Recently. thanks to contract farming. This will require both public and private sector investments in roads.

While the corporate will have us believe that contract farming is the panacea for all the ills affecting the agriculture sector in the country today.
It is also believed that the participation of the corporate sector in the farming segment will play a crucial role in technology transfer. as not only do they get the raw material as per their specific demands.Contract farming in India
"We are not encouraging a model of leasing land and allowing the private sector to acquire it for cultivation. It leads to significant gains for them. Significantly. They seek to integrate the supply chain to ensure timely availability of quality and quantity of raw material. capital inflow as well as lead to assured markets for crop production.
It is clear why the business sector is gunning for contract farming.
.
Contract farming involves a pre-agreed price between the company and the farmer." he said. The agreement is defined by the commitment of the farmer to provide an agricultural commodity of a certain type at a time and a price and in the quantity required by a committed buyer. mostly a large company. it also reduces the procurement cost for them by doing away with the middlemen. the cost is also much less. it remains to be seen whether it really turns out to be so. He also disclosed that the Centre is encouraging farmers to form grass-root level associations or informal cooperatives owned and managed by farmers themselves or producer companies.

Till today. Reliance Life Sciences. PepsiCo India's project with the Punjab Agro Industries Corporation and Punjab Agriculture University remains one of the most ambitious contracts farming projects in the country.
The United Progressive Alliance government's 'approach paper' to the Eleventh Plan gives clear priority to the development of contract farming." PepsiCo spokesperson said.
"PepsiCo's involvement in Indian agriculture stems from its vision of creating a cost-effective. localized agri-base in India by leveraging its access to world class agricultural practices. ITC (agri-business division) and McDonalds are some of the prominent business giants. "The programme focuses on evolving agricultural practices to help Punjab farmers produce crops that would make Indian products internationally competitive. as well as for vegetable crops such as potato. chilli and groundnut." says the spokesperson What has been of crucial help to the business houses venturing into contract farming is the amendment of the Agriculture Produce Marketing Committee Act in 14 states. PepsiCo and other companies have used the contract system for the cultivation of Basmati rice. which allows farmers to sell their produce in open markets. This has opened the gates for the companies to enter this segment. A working group set up by the National Development Council has also made a set of proposals to promote contract farming.Contract farming in India
PepsiCo was the first company in India to start contract farming of tomatoes in Hoshiarpur district of Punjab. which have either started contract farming projects already or are in the process of actively discussing them with various state governments.
.

the agencies involved. the minimum price of the produce is fixed in advance. In the present scenario. in the present context. It has also proposed tax rebates for food processing. Generally.
. the increasing number of farmers' suicides is seen as a reflection of the fact that agriculture is no longer seen as a profitable venture. contract farming is clearly a win-win situation for both the corporates and the farmers. In most cases.Contract farming in India
The group suggests greater liberalization of laws and rules for crop contracts. the terms and nature of the contracts vary according to the crops grown. duty-free imports of machinery and equipment and liberalized imports of seed varieties for contract farming. However. while the farmer supplies land and labour. contract farming seems to be the only choice left open to them. This is mainly because the company provides all the material including seeds as well as technical know-how and there is also a guarantee of purchase of the produce after harvest. Agriculture sector is facing a number of problems in the country and farmers actually don't have many options in the matter of deciding whether or not to go in for contract farming.
With rising debt and soaring seed and fertilizer costs.
However. a farmer's participation is limited to production in the fields. the farmers themselves and technologies and the context in which contract farming is taken up.
The model which is most popular in the country today is the one in which the contractor supplies all the inputs required for cultivation.

In fact. therefore. The main thing is that farmers don't have any role to play in contract farming except providing the corporates with labour and land. The government should also take into account that the situation is very different in our country as compared to other countries.
. which is currently used to grow staple crops like wheat and rice." says Dr Kishan Bir Chaudhary of Bharat Krishak Samaj.000 farmers in the country.
"We are bound to lose food security considering the way the government is supporting contract farming without thinking of farmers. will be used to grow crops required by the food-processing industry. the crop required by the company is not recommended for that particular area. This can also have negative implications on the quality of soil. which also has a significant overseas market. contract farming is likely to increase the problems. many corporates enter contract farming to fulfill their export obligations.
The main concern is that the land. There is also a belief that it might also lead to the loss of natural seeds. Many times.Contract farming in India
This makes the economic security offered by the contract farming very attractive. About 70 per cent of the population is dependent on agriculture. The government should involve the farmers in policy making otherwise their concerns are likely to be left out. It is believed that contract farming would double agriculture exports from India to $20 billion by 2010. The switch to contract farming. leads to a rise in exports. implying that the country might become dependent on imports. Many believe that the rampant increase in contract farming will eventually lead to loss of food security of the country. which claims to represent around 5. The detractors of the contract farming believe that far from being a panacea for agriculture sector.

"Farming was hardly a profit making venture but thanks to the company people we also can afford to have some self-respect now. there is a need for the government to step in and monitor the contract farming practices. He observes in his study. who owns a 3-acre farm at Loni Khand village." says Shirish Mane. Dr Sukhpal Singh of Indian Institute of Management.
Certainly. there are problems associated with companies also like if a crop doesn't meet their requirements they will not take it. not all contract farming is bad for farmers. It can lead to sustainable cultivation practices. conducted a study 'Contract Farming for Agricultural Development: Experience of the Indian Punjab and Northern Thailand'. in a political economy. Recently. It is also because public institutions have failed to provide farmers with the essential protection and support required for viability on a sustained basis. For instance. about 20 kms from Pune. Ahmedabad."
But for farmers. it has to be a particular variety and it's not like anything will do. Of course. if they want chilli. this is a matter of survival. is one mode of capitalist penetration of agriculture for capital accumulation and exploitation of the farming sector by agri-business companies. However.
. "Contract farming.Contract farming in India
There have been numerous studies to examine the impact of contract farming on farmers.

2007
.Contract farming in India
Map 1: Waste land area as percentage of geographical area in each state of India.

2007.
.Contract farming in India
Map 2: Percentage share of different states in total waste lands in India.

storage. food processing. changing the position of the country from importer to exporter thus helping in attaining self-sufficiency but still their is a need of further improvement. although most agricultural business today are in some way economically connected to the dominant food industry players. The term also includes the influence of these companies on education. It does not refer simply to any incorporated agribusiness enterprise. Corporate farming is a fairly broad term deals with the general practices and effects of a small number of large global corporations that dominate the food industry. Post independence period brought about many agrarian reforms. with green revolution being an important milestone. distribution.
. research and public policy. through their educational funding and government lobbying effort. machinery. what is seen by some as the practices of would-be mega corporations involved in food production on a very large scale.
CORPORATE FARMING IN INDIA
Corporate farming is not a new concept to India. and encompassed not only the farm itself but also the entire chain of agriculture-related business. including seed supply. specifically. marketing advertising and retail sales. Corporate farming is often used synonymously with agribusiness. It is a modern food industry issue. transport. Historical evidences show that such practices have been prevalent since British colonization when the farmers had contracts with East India Company.Contract farming in India
CORPORATE FARMING
Corporate farming is a term that describes the business of agriculture. agrichemicals.

a subsidiary of Reliance Industries (Mukesh Ambani group) India Contract farming in
Gujarat. several corporates involved in agro-commodity trading. And horticultural crops
Recognising the need of such improvement in the farming sector. agro forestry.41 hectares in the case of large category holdings.2.
. and Punjab. Even some farmer leaders like Sharad Joshi of Shetkari Sanghatana argue that the state should facilitate the exit of small and marginal farmers from farming by buying their land at market prices and provide them capital and training to go for non-farm occupations. It leads to better allocative efficiency.
CORPORATE FARMING : A TOOL FOR GROWTH OR NOT
It is argued that large-scale corporate agriculture is more efficient than peasant farming prevalent in the country.69 and 5. management. and results in higher output. The ownership holding averages for these categories were even smaller with the exception only of large category holdings which was slightly larger (Singh. 1997). These small holders should get out of farming if they are not able to move on to more export-oriented and commercial crops like fruit and vegetables as it will not be viable to grow food crops on small holdings. technology. 2005). exports etc. The average size of the operational marginal holdings was only 0.35 hectares and those of the small holdings 1. it has been argued that the small and marginal farms even in states like Punjab are not viable for sustaining a family and need larger holdings (Johl.medium and medium category holdings and 15. and financial resources to face the challenge of the Second Green Revolution should be permitted to do farming as an agribusiness (Joshi.79 hectares respectively of the semi. Ltd. income and exports (Mishra. 1995). Only those who have the mindset. induces higher private investment in agriculture.41 hectares in 1992 compared with 2. In fact. processing. Jamnagar Farms Pvt. 2006)..

1995). of the small farmers (60% of all) who owned less than three hectares of land each. It is argued that India has been exporting some agricultural products which are available for exports after meeting domestic requirements.
. But. only 20% farmers had more than five plots each. 2004). exportoriented agriculture requires large investments which only big agri-business enterprises can afford (Rangswamy. which results in losing the established markets. 1993). higher transportation costs of inputs and outputs. 1994). small farms are highly fragmented. negative externalities for land quality improvement like irrigation. the study showed that fragmentation had adverse impact on the technical efficiency and the production of most of the crops. This not only leads to instability of supplies in domestic markets. loss of land on boundaries and greater potential for disputes (Mani and Pandey. Further. 35% had 3-5 plots and 25% had 510 plots and the remaining less than three plots. if not owned holdings (Parikh and Nagarajan. The costs of fragmentation included increased travel time between farms and hence lower labour productivity. On the other hand. of all the farmers in the village. Land transactions have led to further fragmentation making them non-viable in terms of resource use as well as family sustenance. that corporate farming is a must for stable production and export performance (Singh. Thus. It is here. small farms were somewhat more fragmented. It is alleged that she has never produced for export. and consolidation led to large gains in technical efficiency. still markets have not even led farmers to consolidate their operational holding. but also a failure to meet export commitments. India ends up going to the world market for importing for domestic consumption as well. Further. Besides.Contract farming in India
Further. another 40% had 3-5 plots each and remaining less than three plots each. A study of a Tamil Nadu village found that.

quality and production. problems start cropping up. lack of transparency and communication etc. why should there be such a restriction on the farm firms or agribusiness enterprises?
BOTTLENECKS AND CRITICISMS
In all the existing (currently working) models of contract farming. while the contracting firm ‘makes’ the price. farmers renege on the contract. Contract farming models can sustain in the long run only if the initiative/empowerment comes from the farmers rather than the user (corporate). inputs. If the market price is more advantageous than the contract price. Critics in the industry are of the opinion that the results are very promising in early years. farmers’ participation remains limited to production in the field . Former Chairman of the Task Force on Agriculture. Other criticisms leveled against contract farming in India include less generation of employment. GoI and Founder of Shetkari Sanghatana. a peasants’ organization in Maharashtra. Another moot point is that in the existing models. food processing. if there is no ceiling on the assets of a firm.Contract farming in India
It is also said that allowing foreign companies to buy and operate land would open the doors to their technology in horticulture. low level of commitment of corporates over rural development. The contract price does not appear to matter much in the early years. etc. “The present legal systems make it impossible to enforce the performance under contract” says Mr. Once the farmers are confident of being able to deploy new technology. farmers are largely ‘price takers’. Farmers benefit from improved technology and higher productivity. labour-saving farm practices.
. technology packages and technical guidance through regular supervision are usually provided by the contracting company.seeds. Sharad Joshi. Further.

A LOT CAN BE DONE DESPITE THE ABSENCE OF A LEGAL FRAMEWORK
 Maintain a proper database on farmers. rewards & public recognition.  Farmer encouraged to set own targets.  Publicizing the names of defaulters in the locality of default.  Maintains a high motivation level.  Repeat defaulters are not considered again. and standardisation and operationalisation of contract farming agreements are the major bottlenecks plaguing contractfarming ventures in India. assist with draft Of QC standards etc.  The difference becomes apparent very quickly
. builds loyalty over the long term.  Incentives.  The social stigma usually suffices as a disincentive to default.  Promotes ‘‘ownership’’ of the business.  Clearly allocate quantities for the fresh market.Contract farming in India
Enforceability of the agreement.

Contract farming in India
QUESTIONNAIRE
Q1 What do you think about the present agricultural condition of India? • • • • • • • • • • • • • • • Highly satisfied Satisfied Not satisfied Yes No No idea Yes No No idea Debt waiver Providing scheme and subsidy Irrigated techniques on subsidy Providing experts advice on various problems Yes No
Q2 Do you really think the input costs in agriculture is very high?
Q3 Do you really think the input costs in agriculture is very high?
Q4 Which scheme do you think gives the maximum help?
Q5 Do you know about contract farming?
Q6.Do you think the contract farming can improve the present state of agriculture? • • Yes No
.

Growth will be led by productivity enhancement & market focus. University System to provide region specific crop solutions .a quasi judicial system of contract enforcement.  Contract farming organizations are allowed to take out realistic & deregulated crop insurance policies.make them part of public information domain. a cognizable offence. Candidates in agri studies to work on contract farming programs  Research system synergy with both farmers & private sector
Government Policies & Regulations
 Make purchase interference by a third party in a contract farming program.D.Contract farming in India
Government Policy Support Technology
 Leverage the ICAR.  Single tier regulation for contract farming at the state level.  Incentivize Ph.  Facilitate import of varieties / hybrids for contract farmers.
.  Required .

taxes. levies on procurement effected by a registered contract farming program.  Legislation needs to be clarified in order to determine whether or not it is permissible to procure agricultural produce directly from the farmers.  Abolish all fees.
.  No taxes or duties on import of agri equipment to be used in a registered contract farming program.Contract farming in India
Government Fiscal Support
 Collect no taxes from food processors involved in contract farming. Compel them to invest in lieu in rural infrastructure & farmer upliftment to the extent of tax saved.  Offer 150% deduction on investments made in the creation of extension services for participating farmers linked to procurement of output. duties.

Several Indian and multinational companies have already begun such initiatives in India and have demonstrated repeated success.Contract farming in India
CONCLUSION
To establish an agrarian economy that ensures food and nutrition security to a population of over a billion. surpluses for exports. and a fair and equitable rewarding system for the farming community. The successful cases should encourage the rest of the producing and the consuming enterprises to emulate them for mutual benefits in specific and Indian agriculture in general.
. ‘commitment driven’ contract farming is no doubt a viable alternative farming model. raw material for its expanding industrial base. which provides assured and reliable input service to farmers and desired farm produce to the contracting firms.